Yields rise on strong U.S. manufacturing data

NEW YORK (Reuters) - U.S. Treasury yields rose on Friday as strong manufacturing data boosted sentiment that economic growth is solid, even after the August jobs report was weaker than economists expected.

The Institute for Supply Management said its index for factory activity soared to 58.8 in August, the highest reading since April 2011.

U.S. consumer sentiment also climbed in August from July as consumers remained optimistic about their personal financial conditions, although confidence was not quite as strong as economists had estimated.

“It’s more positive data, rolling on what was although not a great employment report, nothing to worry about either,” said Thomas Simons, a money market economist at Jefferies in New York.

The Labor Department said earlier on Friday that nonfarm payrolls increased by 156,000 last month, below expectations.

Average hourly earnings rose three cents, or 0.1 percent, after advancing 0.3 percent in July, keeping the year-on-year gain in wages at 2.5 percent for a fifth consecutive month.

Treasury yields initially fell after the release of the employment report on what analysts said was a data provider erroneously showing a downward revision in July wage growth. After it became clear there was no such revision, yields turned higher.

“People initially looked at the hourly earnings, the revision down. That’s been changed,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York. At their session low, benchmark 10-year yields US10YT=RR hit 2.10 percent in the immediate aftermath of the jobs data. The yields rose to 2.16 percent after the strong manufacturing figures. The Federal Reserve is expected to announce plans to pare its balance sheet at its September meeting, with an interest rate hike in December also viewed as possible.

The jobs data “stills sets up for the balance sheet reduction in September, and we’ll still see a 50/50 chance of a December rate hike,” Lederer said.

Trading volumes have fallen in the past two weeks as investors hesitate to buy Treasuries with yields near their lowest levels since late last year.

On Tuesday, 10-year Treasury yields US10YT=RR dropped as low as 2.086 percent, the lowest since Nov. 10, on safety buying after North Korea fired a ballistic missile over Japan’s northern Hokkaido island into the sea. Besides geopolitical tensions over North Korea, another concern is uncertainty over whether the U.S. government will be able to raise the debt ceiling later this month, as it says is necessary.

“There are still quite a bit of pretty significant risks out there that are going to keep an upwards ceiling on yields,” said Simons.